Higher hospital prices mean smaller paychecks and inflated premiums

The U.S. is on track to spend $6 trillion on health care this year and $9 trillion by 2034. Health policy experts have long known that high prices are the key drivers of health spending.

The late health economist, Uwe Reinhardt, published a paper in 2003 famously titled, “It’s the Prices, Stupid.”

The much-circulated paper concluded that the main reason the U.S. spends more on health care than other developed countries is because of exorbitant prices on hospitalizations, drugs, and administrative overhead. The analysis was updated in 2019 with the same conclusion.

Higher hospital prices are responsible for inflated premiums and smaller paychecks. Hospital prices have grown faster than virtually any other sector in the economy and are the biggest driver of insurance premiums. And, over the last 25 years, health insurance premiums have grown at nearly triple the pace of U.S. worker earnings. Earnings are simply not keeping up with rising health care prices.

Since 2003, hospital prices have escalated primarily due to high consolidation of health care systems. Hospitals are merging with other hospitals and hospitals are acquiring outpatient clinics, giving hospitals more power to negotiate higher reimbursement rates.

When hospitals acquire outpatient clinics, hospitals are able to charge more and tack on a facility fee for clinic services. With the ability of hospitals to charge higher reimbursement rates for outpatient services it should be no surprise to learn that hospitals are racing to buy clinics.

The number of hospital outpatient visits per 1,000 people increased from 1,853 in 2000 to 2,426 in 2023, a 31% increase. According to studies on health care consolidation reviewed by the U.S. Government Accountability Office at least 47% of physicians were consolidated with hospital systems in 2024, up from 30% in 2012, an increase of 56%.

Hospitals are typically the largest employers in our communities, provide community benefit (though much less than their tax breaks), and save lives. People have significant affection for their local hospital and the dedicated hospital employees. But there must be limits to what some hospitals charge for services and limits on paying excessive executive salaries that leave folks struggling with medical debt.

Two in three Americans (67%) believe stopping hospitals from charging excessive prices should be a top priority for the federal government.

Unfortunately, progress on this in D.C. has been slow. Congressional activity has focused on hospital reporting and strengthening price transparency rules that have been largely ineffective in reducing medical inflation. One area of promise is the Department of Justice settling antitrust cases concerning anticompetitive hospital contracts.

There are opportunities for states to step in to figure out how to make health care more affordable, while at the same time trying to rescue rural and safety-net hospitals.

Minnesota legislators interested in tackling health care affordability should reference a new report by North Star Policy Action. It highlights a variety of policies Minnesota and other states may pursue to help address rising health care prices.

One option discussed in the report includes using reference-based pricing in the state employee health plan (with hopes that employers will adopt similar reimbursement strategies). Reference-based pricing typically caps reimbursement to providers at a certain percentage of Medicare reimbursement rates, likely 150-200%. Oregon’s cap led to a 25% drop in outpatient facility prices, generating $107.5 million in savings in 27 months. When Montana used reference-based pricing for state employees, it saved approximately $48 million over two years.

A second policy option is to ban anti-competitive contracting practices used by hospitals such as anti-tiering, anti-steering, and all-or-nothing bundled contracts. Anti-tiering clauses require insurers to place hospitals into preferred tiers of a health plan product and anti-steering clauses prevent health insurers from directing patients to lower-cost providers. All-or-nothing bundled contracts require insurers to contract with every provider in the system or none of them.

When hospital systems become large, insurers have difficulty excluding them from their network. Large hospital systems gain more leverage in setting the terms of the contract with insurers, often force insurers to contract with every provider in their system and demand insurers pay top reimbursement levels.

A recent report by the Council of Economic Advisors, a federal agency in the executive branch that advises the president on economic policy, estimates that a ban on anti-competitive practices would reduce hospital and affiliated-physician prices by 18% (averaging $4,100 per inpatient admission) and would reduce employer-sponsored insurance premiums by an estimated 6.5% (premiums savings of $1,800 per family annually and $600 per individual).

Other policy options legislators could consider include enacting site-neutral policies, updating corporate practice of medicine laws, creating affordability standards, increasing oversight of health care consolidation and removing hospitals’ non-profit status if they fail to provide sufficient community benefit and pay excessive executive salaries.

Responsibility of health care affordability also falls on employers. Employers who provide health insurance coverage to their employees should demand access to data on provider reimbursement levels to address affordability and select efficient providers.

Employers need to understand their fiduciary responsibility and leverage their bargaining power to drive down health care prices and hold hospitals accountable.

In Indiana, large employers organized and helped Republicans pass legislation capping commercial hospital prices. If a red state like Indiana can regulate health care prices, then it can surely be done in Minnesota.